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Warner Music’s bid of EMI will bring will bring together uncomfortable bedfellows, but analysts welcome deal.

By Reuters

Thu 22 Feb 2007 05:24 PM

Warner Music Group has made a bid approach for Britain's EMI despite uncertainty over whether any deal would win regulatory approval, in the latest twist in a seven-year tit-for-tat takeover battle.

EMI, which announced the move on Tuesday, said there was currently no proposal for the board to consider and no certainty that the approach would result in one, but the statement still sent its shares up 5.4 percent to 233-1/2 pence at 1140 GMT.

Analysts had speculated that EMI, the world's third largest music company and home to Robbie Williams and Coldplay, could receive a fresh takeover approach after it last week issued its second profit warning in just five weeks.

Warner, the fourth largest music major, has also struggled recently, reporting a 74 percent drop in quarterly profit due to its artists having fewer hits, and any tie-up would give both sides access to more artists and the ability to cut costs.

It would also help solve EMI's historical problem of having the smallest market share out of the four music majors in the United States -- the world's largest music market.

But any fresh attempt could run into the same regulatory problems that have hindered previous efforts.

"The regulatory outlook is still very uncertain," said Numis Securities analyst Richard Hitchcock. "But given how difficult the trading environment is -- U.S. physical sales are down 20 percent in the year to date -- they (Warner Music) will no doubt argue that the case for consolidation has been strengthened."

Analysts said any bid was likely to be pitched around 260 pence a share. Warner offered 320p a share for EMI last year.

EMI and Warner Music first tried to merge in 2000 and again in 2003. Last year, they were locked in a $4.6 billion battle to buy each other, but hopes of a deal were quashed in June when a European court annulled approval of the 2004 merger of Sony Corp's Sony Music and Bertelsmann's BMG.

That ruling cast doubt on whether EMI and Warner Music would get regulatory clearance, and the companies abandoned talks until there was more clarity from antitrust regulators.

The European Commission is now examining the refiled Sony-BMG application, which would create the world's number two music company, with a deadline of March 1.

By then, it could decide to either clear the deal, ask the companies to provide remedies to any competition concerns or open an in-depth investigation that would last 90 working days, with most analysts expecting the latter.

The music industry has struggled in recent years as the growth in legal downloading has not yet made up for the slide in physical sales but EMI's recorded music business has been hit particularly hard, with the poor performance of new releases such as Williams' "Rudebox".

All groups have been looking to grow their digital revenues. Barney Wragg, the former senior vice president of Universal music's digital division, told Reuters recently he had joined EMI because it was so focused on its digital business.

But according to analysts at Jupiter, it has some way to go as Universal, the world' number one music company, has been the most successful at growing its digital business, ahead of Sony BMG in second, Warner in third and EMI in fourth.

EMI said it would consider any proposal with "a particular focus on conditionality, the regulatory and operational risk profile, and on valuation in relation to the company's standalone value and the value creation available from a combination".

Panmure analyst Alex DeGroote said in a note that the announcement would likely alert private equity, who would be interested in the publishing side of the business, but that Warner was the most likely suitor due to potential synergies.

Media reports over the weekend suggested EMI was considering "re-engineering" its balance sheet by borrowing against the more reliable publishing side, and one analyst noted that this may have prompted Warner to act as any acquirer would want to go through that process themselves.